Friday, 28 October 2011

India’s economic complexity will foster rapid growth

Ricardo Hausmann and Cesar Hidalgo, professors at Harvard University and MIT, along with a team of researchers, put forward a new method of measuring a country’s potential for economic growth.
They say that this potential is best measured by a country’s economic complexity or its capability to make a wide and diversified range of products in which a lot of knowledge is embedded.

While the tendency is to measure technological progress by looking at high-profile examples like space travel, the fact is that our lives have been enriched enormously in the past two centuries by products such as electric bulbs, phones, antibiotics, TV and advances in agrichemicals, water purification, port management, etc. Bits and pieces of this productive knowledge are distributed among the population of a country and this knowledge is then brought out through organizations and markets.
Adam Smith had long ago pointed out the benefits of division of labour and a modern complex economy contains vast quantities of specialized knowledge among persons, and organizations and markets are able to harness this knowledge and build products. Much of this knowledge is not available in books and manuals, but is tacit, acquired through trial and error after long years of experience. It is not easy to acquire.
“Increased economic complexity is necessary for a society to be able to hold and use a larger amount of productive knowledge, and we can measure it from the mix of products that countries are able to make,” point out the authors. There is a strong correlation between the level of economic complexity and a country’s income per capita.Also See | Growth Potential (PDF)
But that’s not all, they also claim their measure of economic complexity has predictive value. They say that “countries whose economic complexity is greater than what we would expect, given their level of income, tend to grow faster than those that are ‘too rich’ for their current level of economic complexity”. In this sense, economic complexity is not just a symptom or an expression of prosperity: it is a driver.
The authors point to two countries whose index of economic complexity is much lower than their income—Greece and Portugal. The current travails of these countries no doubt are related to this fact. They are, in short, living beyond their means. Similarly, countries that rely on exports of primary products such as crude oil, have fewer opportunities for growth in future.
Japan has the top rank in the economic complexity index, followed by Germany, Switzerland, Sweden and Austria. The US is at number 13 and the UK at number nine. India is ranked 51st, while China is number 29. Interestingly, India is higher up than Brazil, Greece, Argentina and South Africa. The rest of South Asia is far behind.
China and India’s economic complexity is well above what is usual for their income levels. These countries thus have the potential to grow very rapidly. In fact, China heads the ranking according to expected growth in per capita income to 2020. India comes second, followed by Thailand. According to the authors’ computations, the US will make the highest contribution to world gross domestic product (GDP) growth to 2020, followed by China and Japan, while India comes in at number four with a contribution of 4.89%.
This novel approach to economic growth emphasizes innovation, education and skill development, and the importance of a diversified economy. As the authors point out, “The secret to modernity is that we collectively use large volumes of knowledge, while each one of us holds only a few bits of it. Society functions because its members form webs that allow them to specialize and share their knowledge with others.”